An overview for homeowners and Real Estate Investors

The 2018 tax code changes are the first major tax code overhaul in 31 years. Here’s a summary of helpful information for both homeowners and real estate investors:

2018 Tax Code Changes

Mortgage Interest Deduction

PRIMARY RESIDENCE

In expensive cities like Austin, the mortgage interest deduction is a significant reduction in tax liability. Beginning in 2018, the mortgage interest deduction is capped at $750,000 of debt. You can only deduct the interest on up to $750,000 of debt.

This 2018 tax code change only affects new loans taken out after 12/14/17. Current loans of up to $1,000,000 are grandfathered and are not subject to the new $750,000 cap. Homeowners may refinance mortgage debts existing on 12/14/17 up to $1,000,000 and still deduct the interest, as long as the new loan does not exceed the amount of the mortgage being refinanced.

SECONDARY RESIDENCE

Like the new cap for primary residence mortgages, the new mortgage deduction limit is $750,000. You can only deduct the interest on up to $750,000 of debt.

HOME EQUITY LINE OF CREDIT (HELOC)

Prior to 2018, you could deduct all HELOC interest if the HELOC limit was $100,000 or less. The 2018 tax code has kept the $100,000 limit, but also requires that all deductible interest must be for proceeds used to substantially improve the property.

State and Local Tax Deduction

This 2018 tax code change affects most people who live in Austin as property taxes are relatively high. Before 2018, you could itemize all of your state property, income, and sales tax. Today, this amount is limited to $10,000. This $10,000 limit applies to both singles AND married couples.

Other Changes

While not directly related to real estate, here are other significant 2018 tax code changes:

• Personal exemptions have been eliminated.

• The standard deduction has increased, from $6,350 to $12,000 for individuals, and from $12,700 to $24,000 for married couples.

• The child tax credit has increased from $1,000 to $2,000 for each child. The age limit stays the same, at 16 and younger. The maximum income to claim the child tax credit has increased significantly to $500,000 for all filers.

Moving Expense Moving and Deduction

Prior to 2018, you could deduct moving expenses if you were moving because of a job change. Starting this year, the only people who can take this deduction are active duty military with orders to move.

What Hasn’t Changed in 2018

Capital Gains Exclusion

The final version of the 2018 tax code removed any changes to the capital gains exclusion. This is huge. You can still avoid paying capital gains taxes on real estate sales. You must reside in the property for at least 2 of the last 5 years, and the excluded gain is limited to $250,000 for singles, and $500,000 for married couples.

If your net gain is greater than these limits, the amount that exceeds the limit is subject to capital gains tax. The capital gains tax rate is generally 15% maximum, but 20% for those in the highest tax bracket.

Depreciation Recovery Periods – For Investors

None of the depreciation recovery periods for investment properties has changed. The periods remain the same:

• Residential rentals – 27.5 years

• Non-residental real property – 39 years

• Qualified* improvements – 15 years

The depreciation “recapture” rate for net capital gains stays the same as before, at 25%.

For More Information

Please consult your tax advisor to learn how the 2018 tax code will affect your tax liability.